How to Mine Physical Precious Metals for an IRA

By

Debbie Carlson

Sept. 8, 2019 8:00 am ET

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With gold prices up nearly 20% this year amid signs of a global growth slowdown and geopolitical tensions, precious metals are getting a fresh look from investors seeking a little insurance for their individual retirement accounts.

Don’t scoff. Physical precious-metals IRAs aren’t just for gold bugs and they’re not a ploy advertised to suckers on late-night TV. These can be a legitimate and suitable investment for people with a long-term horizon who can benefit from precious metals’ role as a store of value and an inflation hedge. Certain precious metals like gold, silver, platinum, and palladium have the Internal Revenue Service’s blessing to fund self-directed IRAs.

Peter Thomas, senior vice president of Zaner Precious Metals and a precious-metals dealer for about 40 years, says he’s seen a steady flow of money into these IRAs for the past 15 years. He recommends younger investors start with small amounts of silver. “It’s extremely inexpensive to start and maintain,” Thomas says.

Opening a precious-metal IRA isn’t as simple as throwing grandma’s graduation gift of a gold Krugerrand in a safe-deposit box, however. The IRS has strict rules to do it right; otherwise, savers may suffer taxes and penalties.

The How-To

Precious metals normally are considered collectibles and not allowed in IRAs, but the Taxpayer Relief Act of 1997 allowed certain gold, silver, platinum, and palladium coins and bars into self-directed IRAs if they met a fineness requirement: 99.5% for gold, which is 24 karats, 99.9% for silver and 99.95% for platinum and palladium.

American Eagle bullion coins are the most popular IRA choice, Thomas says. The IRS also allows bullion coins from certain sovereign mints like the Canadian Maple Leaf and the Austrian Philharmonic, among others.

To open a precious-metals IRA, Thomas recommends people use custodial firms specializing in these vehicles because they are familiar with the IRS compliance guidelines. These self-directed IRAs must be held in what’s called an “arm’s-length” account under the control of a custodian.

Ryan Griffiths, director of investor services at New Direction Trust Co., says in addition to fineness requirements, IRS guidelines say physical possession of the metals must be with a bank, credit union, or trust company.

What Gold Is Allowed

In 1997, Congress allowed the following bullion precious metals to be saved in an IRA.

• Bars or rounds produced by an accredited refiner, manufacturer or national government mint that meet the minimum fineness requirements

Precious-metals IRAs are like any other qualified retirement account. Savers can roll over money from another qualified plan or they can transfer cash to fund the account; however, they can’t put in any bullion they currently own or get from friends or family, Thomas says, as that violates IRS rules about self-dealing.

Griffith says once the IRA is funded, the saver needs to contact a precious-metals dealer to select their bullion. The IRA owner directs the custodian to send the money to the dealer. Once the transaction is complete, the bullion needs to be stored. IRA custodians typically partner with third parties since most don’t have their own vaults. The IRA owner chooses a vault and directs the precious-metals dealer to ship the metal.

The IRA owner must receive firsthand confirmation of all three steps, Thomas says, which is necessary for IRS record-keeping.

When looking for a precious-metals dealer, savers can use a local coin shop or an online purveyor. But it’s important to check credentials, says Mike Fuljenz, president of Universal Coin & Bullion, such as being an authorized precious-metals dealer of the Professional Numismatists Guild and looking at reviews in the Better Business Bureau.

Counterfeit coins and bars can be a serious problem, he warns. “You might also ask if the trust or depository verifies the authenticity of the product they’re getting,” he says.

It can be difficult to get money back from someone who sells fake products if the company isn’t a longtime reputable company, he adds. Contact local law enforcement, the Numismatic Crime Information Center and a national Professional Numismatists Guild Authorized Precious Metals Dealer for help if counterfeiting is suspected.

Keeping Costs Down

While a physical precious-metals IRA can be more costly to maintain than buying a physical-metal backed ETF, savers who choose physical IRAs want the peace of mind that comes with actually owning metal. An ETF gives its owner exposure to the metal’s price movements, but with a few exceptions most precious-metals ETFs are cash-settled, so the owner never receives any metal when selling the ETF. By putting physical metal in an IRA, the saver can always tap that asset in a worst-case economic scenario and have metal returned to him or her.

The premium to buy bullion bars is slightly lower than coins because minting coins takes a few extra steps, Thomas says. Premiums will fluctuate with demand, but generally for 1-ounce gold bullion bars expect to pay about 2% over gold’s spot price. Premiums on 1-ounce American Eagle gold coins are usually 3% to 3.5%. “Never pay anything more than 5% over the spot price for metal you put into an IRA—that’s too much,” he says.

For record-keeping and maintaining the account, IRA owners can expect to pay about $100 to $150 annually to the custodian, Griffiths says. The cheapest storage option in a domestic vault ranges from $100 to $200 annually for allocated storage, where metal of the same type is commingled. People who want the exact bars or coins they put into storage can opt for segregated storage, which Griffiths calls “bar-in, bar-out.” That usually costs anywhere from 0.50% to 0.75% of the value of metal stored, annually.

Just as equity or bond owners can change their IRA’s asset allocation, so can precious-metals owners. They must work with the IRA custodian and precious-metals dealer when buying or selling to stay within IRS rules, Thomas says. He recommends having a mix of types of metals and denominations to make it easier to sell smaller amounts when owners need to take a distribution. “I can’t just cut off a piece of a gold kilo bar,” he says.

When taking distributions, Griffiths says there are two approaches: In one, the custodian sends the IRA owner the metal, who then has to settle up any tax payments with the IRS. In the other, if the owner wants to liquidate the metal into cash before taking a distribution, some custodians will withhold the necessary IRS taxes and send the owner the cash.

Don’t Store at Home

Precious-metals owners often like to keep their metal in a home safe, especially if they view metal as an insurance policy for crisis times. Scott Schwartz, executive vice president and general counsel of Delaware Depository, says that’s fine for regular metal ownership, but not for IRAs.

“You have to be very mindful that the IRS has jurisdiction over these assets,” he says.

Be wary of advertisements for “home-storage IRAs” or “checkbook IRAs,” experts say. These advertisements suggest that IRA owners can keep metal in their possession or in a bank safe deposit where the owner has the key. This isn’t allowed under the rules, and it can result in typical IRS taxes and penalties related to IRA withdrawals. The IRS is clear on this when it comes to IRAs, stating it allows only “certain highly refined bullion provided it is in the physical possession of a bank or an IRS-approved nonbank trustee.”

There is some debate in the industry whether the vault also needs to be a secondary trustee if it is not a bank or credit union, although most say the storage facility doesn’t need trustee status if the IRA custodian is a bank, credit union, or trustee.

The rule also applies to indirect ownership, such as opening a limited-liability corporation to own a precious-metals IRA. These still can’t be stored at home, Griffiths says. “If you invest in a piece of gold and it is not stored in the custodian’s possession, it’s a collectible; it’s a prohibited transaction,” he says.

How to Mine Physical Precious Metals for an IRA

With gold prices up nearly 20% this year amid signs of a global growth slowdown and geopolitical tensions, precious metals are getting a fresh look from investors seeking a little insurance for their individual retirement accounts.

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